The Big Gulp

What is driving 7-Elevens thirst to acquire, and which companies are next.

Land of the Rising Sun

Today, 7-Eleven is anything but idle. And as the North American subsidiary of Tokyo-based SEJ, which is owned by Seven & i Holdings Co., it has tapped its parent company’s best practices to fur­ther hone its domestic operations.

“As Seven & i has taken more of an influence over 7-Eleven Inc., a lot of the strategy is being driven from the Japanese operation,” says Robert Gregory, global research director for Planet Retail, a Lon­don-based retail intelligence firm.

Back in the 1990s, Southland Corp.’s Japanese parent started a review of the U.S. operations. What it found: By nearly every measure, the U.S. 7-Eleven stores lagged dramatically behind the Japanese sites.

“Profit margins were about half what they’re achieving in Japan, and sales densi­ties are way down,” says Gregory. “If we can move it more toward the Japanese model and bring up efficiencies, there’s a huge uplift in terms of the benefit we can bring to it.”

The Japanese model: a triple focus on building in-store sales—led by fresh and hot foods, as well as private label— clustering of stores to grow efficiencies, and continuing to expand the percentage of franchised locations through initia­tives such as the Business Conversion Program, which transitions single-store independents into 7-Eleven franchisees, as well as growing the number of multi-site franchisees.

As veteran industry consultant Dick Meyer points out, the move to 100% fran­chisee-run operations has huge financial implications for 7-Eleven, because fran­chisees with fewer than 50 employees are exempt from providing health insurance under the Affordable Care Act.

It also reveals how much 7-Eleven and its franchisee base—as represented by the National Coalition of Associations of 7-Eleven Franchisees—have resolved any tensions over time.

Consider the shared learning a form of payback. When Ito-Yokado first gained licensing rights to 7-Eleven in Japan, it opened stores based on the U.S. model— and quickly struck out.

“They were selling Slurpees, which are very popular in the U.S.,” Gregory says. “In Japan, they weren’t popular at all, and actually failed.” But after a few years, the company removed low-performing items, revamped the store format and cut the locations to about half the size of the average U.S. store. Fresh and to-go foods became the focus of the stores, with hardly any selling fuel.

This model has proven extremely successful, so much so that it is spread­ing across Asia, a highly underdeveloped region for the brand. “It is less reliant on gasoline, more situated in residential and urban locations, and very much clustered together,” says Gregory, who cites that in Bangkok, Thailand, for example, several 7-Elevens will coexist on the same street, nearly all franchisee-owned.

The Japanese have pursued a strat­egy of high market presence, or what 7-Eleven calls “market concentration”: identifying an area with high growth potential because of demographic trends and/or the lack of strong competition.

“They really try to get this high store density,” Gregory says. “If they can get a number of stores within a defined area, even though they might compete with each other, there are actually quite a lot of advantages.” For example, distribution is simplified, brand awareness intensifies and marketing becomes more efficient.

“This is something they’re really push­ing in the U.S., targeting big cities—New York, Los Angeles, Chicago,” says Gregory. “So over the next few years, it will be the case that there are more 7-Elevens crop­ping up in the same area even though they compete with each other.” (Sites that are part of the Business Conversion Pro­gram are exempt from a policy requiring 7-Eleven franchised locations to be at least a half-mile from each other.)

According to Jeff Kramer, CEO of Prima Marketing LLC, a licensee that sold 76 sites to the company last fall, 7-Eleven feels there is room for many more of its locations in the United States.

“If you look at a map, you can see a lot of holes in the country where 7-Eleven does not have a presence; maybe it had a presence years ago but pulled out,” he says. “There are many areas where if you have a strong brand and solid program, they can fill in around the country to be a true national brand.”

He and others also suggest that a stalled Japanese economy—weakened by a two-decade-long recession and the continued recovery from the 2011 tsunami—is encouraging Seven & i to place its weight on U.S. growth. But while the Japanese economy is soft, Gregory of Planet Retail does not see this as being a major growth trigger for the United States, pointing out that 7-Eleven has managed to “hold its own” in Japan, partly thanks to its ability to expand and sign on new franchisees.

Rather, the sites in Japan have become so efficient that any future growth will be incremental. “Sooner or later, expansion’s going to run out,” he says. “There are plenty of opportunities in other markets, whether it be the U.S., China or Mexico.”

And it is not only the quality of the sites that have reached a high-water mark—it’s also the market saturation. Consider, for example, that while Japan has roughly the land mass of California, it has 6,000 more 7-Elevens than the United States, Canada and Mexico combined.

Put another way: While 7-Eleven is far and away the largest c-store operator in the United States, it controls less than 5% of the U.S. c-store count, compared to SEJ’s nearly 31% share in Japan.

“That shows just how many 7-Elevens they can fit into a certain area,” Gregory says. “So they’re looking at a place like the U.S. or Canada and saying we can possi­bly have double the amount of 7-Elevens if we can get the model more efficient.”

Picking Up Food

With higher food sales a core directive for 7-Eleven, building the most efficient foodservice operation has been para­mount for the chain. DePinto has said publicly that supply chain is an Achilles’ heel for much of the industry, especially with foodservice. Fresh food in many cases means daily deliveries, which are costly on several levels.

“They want to ... focus more on the sale of products, especially fresh foods, such as sandwiches and takeaway foods,” Gregory says of 7-Eleven. “As a part of this, to be successful, you need to have a number of deliveries to that store every day. Maybe a truck in the morning deliv­ers fresh bakery items; maybe later you’ll have it delivering more merchandise based around pizzas, etc. Having a num­ber of stores clustered together in the same area enables this to become more of a reality.”

Obtaining that magic number of stores to support a commissary and distribution infrastructure could very well be the No. 1 reason for 7-Eleven’s M&A activity. Speaking on condition of anonymity, one licensee sees foodservice as the prime motive for 7-Eleven’s acqui­sitions. “They have to have enough stores to support the foodservice hub,” he says.

Indeed, Mike Triantafellou, CEO of Handee Marts, Gibsonia, Pa., which sold its 58 sites to 7-Eleven last October, told the Pittsburgh Tribune-Review at the time that one of the key drivers of 7-Eleven’s business is to have fresh foods delivered daily. “We didn’t have the numbers to put that kind of distribution in place,” he said. He expected 7-Eleven to build a distribution center, bakery and fresh food commissary, accessible to the Pittsburgh and Cleveland markets, to supply the sites “because now they have enough stores to make that work.”

McLane Co., Temple, Texas, is 7-Elev­en’s primary wholesaler; it also relies on a network of Combined Distribution Cen­ters across the country for daily distribu­tion of fresh products to customers’ stores.

Another sign of its laser focus on food: In early 2012, it hired Kelly Buckley, a 20-year restaurant industry veteran, for the newly created role of vice president of fresh foods innovation, and who is charged with leading a “restaurant-quality” team to introduce more fresh foods to the chain.

The truth is, 7-Eleven ranks modestly when it comes to industry foodservice sales. Whereas foodservice represents nearly 17% of inside sales for the channel, according to figures from the NACS State of the Industry Report of 2011 Data, at 7-Eleven it generates less than 12%, according to company figures. (Note: That gap may be smaller because 7-Eleven does not count dispensed beverages in foodservice the way NACS does.) Analyst Gregory says parent company Seven & i would like the share of food sales to be closer to that of its Japanese sites, where it accounts for roughly 30% of sales.

And 7-Eleven is already publicly showing its continuing com­mitment to foodservice. A new hot case of pizza (whole and sliced), a variety of chicken wings, chicken tenders and mini tacos was tested in San Diego; in just a few months it rolled into major markets such as Washington, D.C., and New York.

The core 7-Eleven menu includes hot foods such as roller-grill foods; a variety of sandwiches, salads, cut and whole fruit, and cut vegetables; and hot breakfast foods such as sausage, egg and cheese quesadillas. Some stores also offer refrigerated pasta dishes and gourmet cupcakes.

Anecdotally, 7-Eleven retailers cite mini tacos, as well as morning bagels and other baked goods, as a hit. A Midwest-based operator, who has been a franchisee for more than 20 years and does not yet have the expanded hot food program, describes the pizza product as excellent if prepared correctly. He also praises 7-Eleven for the quality of the foodservice equip­ment, which includes ovens from TurboChef Technologies. Overall, however, he worries about a lack of regional appeal.

“My concern with 7-Eleven’s foodservice push is they’ve got to regionalize the taste profile,” he says. “They insist on a one-size-fits-all product assortment. I’m smack-dab in the middle of the country, and we don’t eat jalapeno peppers at every meal. But a lot of what 7-Eleven likes to roll out has a Southwest flavor to it.”

Others who have observed 7-Eleven’s growth in the category are amazed at its advances in everything from product quality to supply chain. Jim Schutz, vice president of people assets for Open Pantry Food Marts of Wisconsin, who witnessed the transition when the company handed over 18 sites to 7-Eleven last summer, describes 7-Eleven as “a master at everything they do.” He was impressed by 7-Eleven’s approach to the position of the foodservice area in the store, with the roller grills and other heating units next to the checkout, and food served by the sales associate.“There is a lot of personal touch there,” says Schutz. “Because it’s close to the cashier area, they are able to keep an eye on that. It’s a lot easier than having the roller grill 10 to 15 feet away to make sure the food’s fresh, hot and full.”

In many ways, 7-Eleven’s journey is the industry’s journey. “Chains are evolving their footprints to emphasize foodservice and the infrastructure it takes to deliver fresh food every day at a reasonable price,” says David Bishop, managing partner of retail consultancy Balvor LLC, Barrington, Ill., citing how similar paths can still mean different business models. “I’d classify RaceTrac as converging into Wawa and Sheetz, while at the same time, Circle K and 7-Eleven are converging into what QuikTrip has done.”

“It’s a good base,” says Kramer, whose sites did not offer the full hot-food offer because there was not a high enough concen­tration of stores to justify frequent deliveries. “I think they have to keep building on it. They’ve done it cautiously because they have a franchise model. It’s important to try to have standardiza­tion and a reliable product the public can count on.”

To Market, to Market

Adding urgency to 7-Eleven’s efforts is what some retailers call “taking advantage of the recession,” which includes acquisition appetizers such as lower real-estate and construction costs, as well as a greater willingness from sellers to make a deal in a buyer’s market, swimming with players in a range of sizes. In 2011, 7-Eleven hired Lend Lease’s Multi-Site Group to handle construction and conversions, managing costs and accelerating the conversion process.

With low interest rates and ready debt and sale-leaseback financing, “it creates more opportunity for people to buy things they may not otherwise be able to buy,” says Ruben of NRC.

Looking at Couche-Tard and 7-Eleven’s recent acquisitions, “generally, they’ve been pretty opportunistic, and bought tradi­tional c-store companies, portfolios, groups of stores, major-oil companies,” says Ruben. “The bigger players that have access to capital have gone where the opportunities are, and they’ve taken advantage of those where they could.”

Jim Fisher of Houston-based site-analysis firm IMST Corp. believes 7-Eleven is seizing a market opening. “They’re just seeing great opportunities and taking advantage of it,” he says. “It’s good retail, not old, worn-out, tired retail. It’s not compa­nies that have starved the goose and have eaten all of the eggs.

They’re buying companies that have been really systematically feeding the goose and have good production.”

Fisher believes 7-Eleven’s push to be a franchise-dominant retailer is also a driving force. “It’s driving the company through acquisitions and through the franchise; they want to find good locations for those franchisees,” he says, describing it not so much as “pent-up demand” but more “an opportunity of now.”

“They’re coming on at the right time because they’ve cleaned up their balance sheet over the past five years, vs. loading it up” like other large chains have, says Buhler of Open Pantry. “I think 7-Eleven will use that strength to buy locations and transform them into franchised sites so they get their money out pretty quickly, and the sites become a cash machine for them.”

But 7-Eleven may hold a unique set of circumstances dating back to its 1987 leveraged buyout. At that time, it had to sell off many of its assets to better focus its potential. A source request­ing anonymity says part of its goal may be to reclaim markets lost in that retrenchment, with the caveat that those markets hold potential going forward.

These motivations could hold true in areas such as Ohio and Pennsylvania, where 7-Eleven made its most recent acquisitions, including Handee Marts, EZ Energy and Prima Marketing; and Wisconsin, where it connected with Open Pantry.

“When you look at the markets where they’ve really had major acquisitions in lately, they are … markets where they are but want to have a significantly enhanced presence,” says Fisher. “They are markets that are growing: Charlotte, Houston, San Antonio, Dallas. Those are very aggressive, very strong economies.”

As 7-Eleven returns to markets, however, it will connect with new and evolved competitors, such as in Houston and San Antonio, says Fisher. “The market’s dynamics have shifted greatly in the very recent past with Susser for Stripes and Landmark for Timewise. There’s new development, whereas in the past there hasn’t been and had been dominated by major-oil companies.”

Similarly, 7-Eleven is re-entering Charlotte at the same time as QuikTrip, and expanding in Florida along with Wawa, RaceTrac and Thorntons. “It was one of those markets that was neglected,” Fisher says, citing the previous lack of a strong retail offer.

While one source suggests that growth may be tempered by the age of some of the acquired assets and the state of their markets—“Many of those stores are older locations in older parts of town,” says the source—overall, the retail giant appears to be buying a mix of properties.

Fisher says sites are in a combination of growth and more established neigh­borhoods. For example, he names C.L. Thomas’ Speedy Stop assets, for which 7-Eleven is reportedly close to finalizing a deal. Many of these locations—old Chev­ron corporate stores that were acquired, razed and rebuilt from 1,800-square-foot stations to 4,000-square-foot stores—have been greatly improved.

“That’s some of the opportunity by buying C.L. Thomas, TETCO and other acquisitions they’ve made: It gives them newer sites in well-established areas,” says Fisher.

But with opportunity, he says, comes challenge. “It takes a totally dif­ferent capability to be a franchisee of a 4,000-square-foot store with a fuel court, 20 fueling positions and 120-foot conveyor car wash, compared to being one with a 2,400-square-foot store with no gas.

“The big challenge is to find those franchisees who are at ease and have the skills to successfully handle that type of retail offering—which might mean they’re going to be looking for those franchisees who can do multiple stores, rather than single.”

True, says the Midwest franchisee. “7-Eleven wants more stores—but I don’t think they want more franchisees,” he says. “I think they will try to get to a position where the single-store franchi­see is a dinosaur. It will be like Subway: In order to be financially successful, you have to have multiple locations.”

To find where 7-Eleven expands next, Fisher suggests focusing on the markets with the strongest economic growth, such as the Sun Belt states and the Southeast. Markets in between North Carolina and Florida such as Atlanta, as well as Alabama and Louisiana, could be candidates.

7-Eleven would examine the same fundamentals as any retailer—site, loca­tion and building quality—says Kramer of Prima Marketing, and are very “econom­ics-driven” and patient.

“The Japanese are very long-term-oriented,” he says. “In other words, they’re not just looking for returns du jour to send the stock up for today. They will continue to look for acquisitions that fit their model.”

Plunge in oil prices sets the stage for record margins and boost in in-store sales. Also In This Issue: Profitability skyrockets for top performers! Other channels seek to redefine convenience! The economy enters a new stage. The growing health-and-wellness trend. Fuel demand; oil's slide; multicultural momentum; and data, data, data!

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